What are the earmarked transactions in terms of banking?
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Earmarking is most commonly used to refer to funds that have been set aside in order to pay for a specific project/ purpose. For example: You have an account with a bank, either SB or CA where you are free to deposit and draw money any day. You have requested your bank for issuance of a bank Guarantee of Rs.1.00 Lac. You need to produce a collateral for this purpose. You can do it in 2 different ways (other than providing an immovable property).
Make Rs.1.00 Lac Deposit from your SB account and give it to the Banker who will have it as a security and issue the Guarantee.
Have the balance of Rs.1.00 Lac 'earmarked' for the Guarantee (Your Rs.1.00 Lac will continue to receive interest) and take the Guarantee. During the period of Guarantee you will not be able to withdraw your earmarked balance of Rs.1.00 Lac. In the event of the Guarantee getting invoked, Banker will pay the beneficiary of the Guarantee from the earmarked funds. If the Guarantee purpose is served, money earmarked will be 'freed' (you are free to take) once the original guarantee is returned to the Banker. Normally this takes place when there is no certainty of period though the Guarantee is given for a certain period.
In a bankruptcy situation, the "earmarking doctrine" allows borrowers -- just before filing for bankruptcy -- to make payments to creditors with funds given to the borrower by another creditor. These funds are earmarked in that they are dedicated to paying off a particular creditor and thus aren't technically part of the borrower's property. The earmarking doctrine requires these types of transfers to have a written agreement from all three parties, and the borrower cannot have control over the funds.
Hope this helps.
Make Rs.1.00 Lac Deposit from your SB account and give it to the Banker who will have it as a security and issue the Guarantee.
Have the balance of Rs.1.00 Lac 'earmarked' for the Guarantee (Your Rs.1.00 Lac will continue to receive interest) and take the Guarantee. During the period of Guarantee you will not be able to withdraw your earmarked balance of Rs.1.00 Lac. In the event of the Guarantee getting invoked, Banker will pay the beneficiary of the Guarantee from the earmarked funds. If the Guarantee purpose is served, money earmarked will be 'freed' (you are free to take) once the original guarantee is returned to the Banker. Normally this takes place when there is no certainty of period though the Guarantee is given for a certain period.
In a bankruptcy situation, the "earmarking doctrine" allows borrowers -- just before filing for bankruptcy -- to make payments to creditors with funds given to the borrower by another creditor. These funds are earmarked in that they are dedicated to paying off a particular creditor and thus aren't technically part of the borrower's property. The earmarking doctrine requires these types of transfers to have a written agreement from all three parties, and the borrower cannot have control over the funds.
Hope this helps.
Answered by
9
The term 'earmark' means to allocate some amount of money for a specific use, so that it could be utilized in future for that sole purpose.
In banking terms, earmarked transactions are those business transactions which are made to claim the pre-allocated fund in order to meet the expenditure.
They can be in terms of reserving funds, blocking funds, committing funds, forecasting funds.
Hope it helps.
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